Cool Mountain Ice Cream Company produces ten varieties of ice cream in large vat
ID: 2450704 • Letter: C
Question
Cool Mountain Ice Cream Company produces ten varieties of ice cream in large vats, several
thousand gallons at a time. The ice cream is distributed to several categories of customers. Some
ice cream is packaged in large containers and sold to college and university food services. Some
is packaged in half-gallon or small containers and sold through wholesale distributors to grocery
stores. Finally, some is packaged in a variety of individual servings and sold directly to the public
from trucks owned and operated by Cool Mountain. Management has always assumed that costs
fluctuated with the volume of ice cream, and cost-estimating equations have been based on the following cost function:
Estimated costs = Fixed costs + Variable costs per gallon X Production in gallons
Lately, however, this equation has not been a very accurate predictor of total costs. At the same
time, management has noticed that the volumes and varieties of ice cream sold through the three
distinct distribution channels have fluctuated from month to month.
1. Develop the general form of a more accurate cost-estimating equation for Cool Mountain.
Clearly label and explain all elements of the equation, and provide specific examples of costs
for each element
Explanation / Answer
In the given case of Cool Mountain Ice Cream Company , there are basically three kind of Sales beng made:
1. Ice cream is packaged in large containers and sold to college and university
2. Packaged in half-gallon or small containers and sold through wholesale distributors to grocery
stores
3. Individual servings and sold directly to the public from trucks owned and operated by Cool Mountain
Hence the cost function should consider the different cost structures.
Estimated costs = Fixed costs + (Variable costs per gallon type 1 X Production in gallons type 1) +(Variable costs per gallon type 2 X Production in gallons type 2) + (Variable costs per gallon type 3 X Production in gallons type 3)